Europe’s new record offshore LCOE forecast at 40 euros/MWh

Dec 5, 2016

Average lifetime revenue for Vattenfall’s Kriegers Flak project in Denmark is forecast to be 20% lower than the record-low bid price and reflects falling CAPEX and cost of equity in the growing offshore wind market, Tom Harries, Wind Energy Analyst at BNEF, told the Offshore Wind Europe conference on November 22.

Vattenfall's winning bid for Kriegers Flak was 58% lower than the cap price for the tender and 31% lower than DONG Energy's 72.7 euros/MWh price for its Dutch 700 MW Borssele 1&2 project, announced in July.

The Kriegers Flak plant will supply power to the Danish grid under a fixed price contract from 2019 to 2032 and is based on 50,000 full load hours, according to documents published by the Danish energy ministry.

The expected lifetime levelized cost of energy (LCOE) for the Kriegers Flak project is around 20% lower than Vattenfall's winning bid price, Harries told the conference.

"We estimate that actually over the lifetime of the project, the average revenue is around $40/MWh [37.6 euros/MWh]," Harries said.

Rising wind and solar power capacity has pushed down wholesale electricity prices across much of Europe. While wholesale prices are expected to rise steadily over the long term, the below chart illustrates how prices in Northern Europe largely hovered between 20 and 40 euros/MWh in 2015 and the first quarter of 2016.

Average day-ahead power prices on Nordpool power exchange

Note: Nordpool average includes Denmark and eight other countries in northern Europe.

Source: European Commission Market Observatory.

Experienced developers with large balance sheets have so far dominated the offshore wind market. Vattenfall and DONG have won the last three auctions-- held in Netherlands and Denmark—and other large utilities such as E.ON, Iberdrola and RWE also represent a significant market share.

However, growing installed capacity has boosted investor confidence in offshore wind power and attracted new companies into the market, Matthias Haag, CEO of the Gemini Wind Park project, said.

"Cost is related to risk and people certainly perceive the risks to be much lower than they were," Haag said.

Gemini plans to commission its Dutch 600 MW project in 2017. The project company is 60%-owned by Canada's Northland Power and its minority shareholders are Siemens Wind Power (20%), maritime contractor Van Oord (10%) and energy and waste company HVC (10%).

Falling costs

Europe commissioned a record 3.8 GW of offshore wind capacity in 2015 and following a brief dip in 2016, annual installations are forecast rebound to 3.4 GW in 2017 and remain between 3.8 GW and 5.0 GW between 2019 and 2023, according to figures from Bloomberg New Energy Finance (BNEF). The consultancy expects competitive tenders to be used for 46% of project commissioned in 2019, and this will rise to a 100% share for projects commissioned from 2021.

The rising use of competitive tenders for large-scale renewable energy projects has prompted even greater focus on project costs.

Average CAPEX for European offshore wind projects have fallen from a peak of around $6 million/MW for projects reaching financial close in 2013, to around $4 million/MW in 2016, according to BNEF data.

Installed capacity is currently dominated by turbines of capacity around 3 MW but most projects in the pipeline will use turbines of capacity 6 to 8 MW, BNEF data shows.

"We've effectively doubled turbine sizes in the last five years," Harries said.

Offshore turbine market share at end of 2015

Source: Wind Europe

Rising confidence in offshore wind projects and a healthy supply of investors looking for new opportunities has also helped lower the cost of equity.

Just 18 months ago, the cost of equity for UK offshore projects was estimated at around 10 to 11% with Denmark projects a “few percentage points lower,” Harries said.

"If you start to have a look at the numbers for Kriegers Flak, I think the cost of equity comes in at around maybe 5%, maybe lower...that's a huge drop in the cost of equity for offshore wind," he said.

Next benchmark

The Dutch government will soon announce results of its 680 MW Borssele 3&4 tender and the winning bid price will provide further detail on cost reductions achieved by the industry. Some 26 bids were submitted in the tender which closed September 29.

Price comparisons between countries can be challenging as offshore wind developers must take into account different risk profiles, tariff terms, linkages to inflation, tail-end merchant power terms and commissioning dates.

Projects in Denmark and the Netherlands benefit from de-risked development costs and the provision of transmission links, unlike in the UK, where higher project risk has resulted in higher project costs, Harries said.

The LCOE for Borssele 3&4 and later Dutch projects is expected to be below $100/MWh (94 euros/MWh), Harries said, even taking into account wholesale power prices upon tariff expiry, inflation rates, and commissioning dates.

Jos Jacobs, Project Manager Business Development of Dutch developer Eneco Wind, said the new competitive tenders have led the offshore wind industry down into a new "lower plateau" of prices.

Even if interest rates rise, costs are unlikely go back above 100 euros/MWh and the tenders for Borssele 3&4 and future Dutch sites could result in prices "even lower than Kriegers Flak," he said.